Pension reform for Illinois is essential, not impossible

Pension reform is a moral imperative. The alternative is a future in which core services are cut, taxes are raised, and pensioners risk losing what they’ve already been promised as the funds go insolvent.

Imagine you took out a $1 million mortgage on a $40,000 annual income.

Your monthly mortgage payment — not including property taxes — would total $3,800 using today’s standard interest rate. Problem is, your monthly take-home pay — after accounting for state and local taxes — is about $2,650.

As much as you wanted that house, you never would have been able to afford that monthly cost, given your ability to pay. Before long, the bank will come knocking to repossess the property. Bad financial decisions always have consequences.

Illinois pension systems, at both the state and local levels, are in much the same situation.

Today, Illinois’ five state pension systems have less than 40 cents out of every dollar on hand needed to pay future benefits, which equates to $130 billion in pension debt. The largest portion comes from the Teachers’ Retirement System, at over $73 billion in debt. The worst-funded system, the General Assembly Retirement System, has a funded ratio of less than 15 percent.

Why?

Politicians signed up state taxpayers for salaries and benefits that never were and never will be affordable.

Some like to point to the state’s history of kicking the can on pension contributions as the cause of these financial woes. While it’s true that politicians at the state and local levels often skimp on required contributions, they do so because the full pension payments — much like a $3,800 monthly mortgage on a working-class income — are budget busting.

The debate about underfunding vs. overpromising misses a simple truth: one follows from the other.

Illinois governments can’t afford the generous pension systems promised by politicians of the past, and that’s why the systems have been underfunded. Pension liabilities are already growing far faster than inflation and personal income, meaning they’re outpacing their funding source. On top of that, the financial pressure of pensions is crowding out core government services at all levels.

An extreme example of pensions crowding out services is already on display in the south Chicago suburb of Harvey. The beleaguered municipality had to lay off nearly half of its police officers and firefighters due to pension-related financial trouble.

But Harvey is far from alone. Nearly 400 downstate police and fire pension systems — over half — reported receiving less in contributions than the Illinois Department of Insurance says was necessary in 2016, according to Wirepoints. At the state level, the pension systems are the leading cause of Illinois’ near-junk credit rating and already consume over a quarter of the state budget when you tally up all pension related expenditures.

Government workers aren’t to blame for the pension crisis. In fact, it’s a problem for them just as much as it is for government finances and taxpayers generally. More than 1,000 miles away in Central Falls, Rhode Island, pensioners rejected voluntary changes to their pension systems. When the city went bankrupt, pensioners — including those already retired and collecting a check — saw their benefits cut by up to 55 percent.

Central Falls and Harvey are warning signs for Illinois.

Our state’s only viable option is meaningful pension reform that starts with a constitutional amendment to allow changes to unearned, future benefits. Rather than deleting the pension protection clause entirely, Illinois should seek to modify it to match states like Hawaii or Michigan which protect only “accrued benefits.” Subsequent pension reforms should include raising retirement ages for younger workers, capping maximum pensionable salary, and doing away with guaranteed permanent benefit increases in favor of a true cost-of-living adjustment pegged to inflation.

The concept of future benefit reforms has been successfully enacted in states like Colorado and Arizona, the latter of which had support from the state’s public sector unions.

Pension reform is a moral imperative. The alternative is a future in which core services are cut, taxes are raised, and pensioners risk losing what they’ve already been promised as the funds go insolvent.

If Illinoisans come to the table and work together, we can find solutions that work for everyone.

This work was originally published Aug. 21 by the State Journal-Register.